CHAPTER

Infrastructure
2 Development
through
Public Private
Partnerships in
Africa$
Emelly Mutambatsere

ABSTRACT
This chapter uses data from the World Bank’s Private
Participation in Infrastructure project database, and hand-
collected evidence on project performance, to examine how
PPPs are applied to infrastructure development in Africa, and
how well they have delivered expected benefits. It has two
analytical parts: an investment trend analysis and a meta-
analysis of project performance and explanatory factors. The
analysis shows growth both in number and volume of
PPP investments that is weaker than that observed in other
developing regions, and more volatile. The performance of
PPP contracts appears to be improving over time with an
overall cancelation rate of 7% over the assessment period.
Although PPPs have contributed to increasing infrastructure

$
The views expressed in this chapter are the author’s, not those of the
African Development Bank, its Board of Directors or the countries they
represent.

45
46 EMELLY MUTAMBATSERE

stock, they have not completely met their potential, especially

with respect to increasing infrastructure access rates. The
main determinants of performance include accuracy of cost-
ing and allocation of risks, consistency of macro policies
with the objectives and functioning of PPPs, coherence of
sector policies and plans and local capacity. Contract cancel-
lations are mainly explained by the misalignment of out-
comes with government objectives, in particular, access and
investment objectives. These findings suggest that PPP appli-
cation should be well planned to ensure coherence of a wide
range of policies, readiness of institutions and capacity of
public sector actors. This chapter contributes to closing infor-
mation gaps on a relatively novel policy instrument, and
provides useful evidence to support prudent policy making at
the time of considerable growth in PPP application.
Keywords: Public private partnership; Africa;
infrastructure; energy; transport; water and sanitation

Introduction
The delivery of economic and social goods and services could in
theory be neatly allocated to the market or the state, depending
on whether such a good or service is private or public. In prac-
tice, the confluence of market and state has muddled this separa-
tion. Public private partnerships (PPPs) emerged from the
realization that at times the best model entails a combination of
public and private functions in a single operation.
PPPs are intended to complement the strengths of the public
sector with those of the private sector. The private sector is expected
to bring creativity, dynamism, flexibility, efficiency and private capital
(Grimsey & Lewis, 2007). The public partner should provide a sup-
portive policy and institutional framework, may provide assets or
other in-kind contributions and often guarantees a minimum level of
patronage revenues for the private investor. The state is also pursu-
ing non-commercial objectives (McQuaid, 2000) such as ensuring
citizens’ access to good quality and affordable public services.
In Africa, the PPP model is being increasingly employed to
develop core economic infrastructure (energy, water, transport
 Infrastructure PPPs in Africa 47

and information and communication technologies (ICTs)), as

well as in social sectors such as health, education, social protec-
tion, among others. This chapter provides evidence to support
prudent policy making at the time of considerable growth in PPP
application.
Using data from the World Bank’s Private Participation in
Infrastructure (PPI) project database on 415 projects that reached
financial close during 1990 2013, and hand-collected evidence on
project performance covering 83 projects, this chapter examines
how PPPs are applied to economic infrastructure development on
the continent, and how well they have delivered expected benefits.
It contains two analytical parts: an investment trend analysis
(Section ‘Salient Trends’) and a meta-analysis of project per-
formance and explanatory factors (Section ‘Performance’). This
chapter also provides an assessment of the main considerations
in PPP application (Section ‘Considerations in PPP Application’)
and concludes with some policy recommendations (Section
‘Conclusion’).

Definitions and Rationale

DEFINITIONS
A PPP is defined in this chapter as any arrangement entailing
partnership between the public sector and private entities in the
delivery of a public service.1 It involves a contractual agreement
in which the private party undertakes to offer certain services to,
or on behalf of, the public authority. The public authority could
be a state actor such as a government department or state-owned
enterprise or a sub-sovereign entity such as a municipality.
Infrastructure PPP models can broadly be classified into four
groups: operation contracts, availability models, concession mod-
els and joint ownerships arrangements. A key distinction of the
different models in the degree of participation by the private
party, which is lowest in operation contracts and highest in joint
ventures. The frequently applied models are discussed below.2

1
Similar versions of this definition were adopted by Delmon (2010a,
2010b), McQuaid (2000), Engel, Fischer, and Galetovic (2010),
Schmidt and Moisa (2004) and Fourie and Burger (2000).
2
Adapted from PPP in Infrastructure Resource Center of the World
Bank (http://ppp.worldbank.org/public-private-partnership/agreements);
Accessed on 26 September 2016.
48 EMELLY MUTAMBATSERE

Management contracts and leases involve the public author-

ity subcontracting asset management services to a private pro-
vider, while retaining full ownership of assets, responsibility for
service provision, investment authority, and often, the responsi-
bility to finance any new investments or maintenance. The two
differ mostly in that under a management contract, the private
party is compensated for its services through a management fee
that also covers operating costs, with the public authority bearing
most of the operational risk, whereas in a lease, the private party
pays a leasing fee to the asset owners (the public authority) and
fully bears operational risk. These contracts can be short or long
term, with contracts awarded for between 4 and 30 years in the
African infrastructure markets over the past two decades (The
World Bank, ICA, & PPIAF, 2009).
Concessions entail the issuance of rights to a private partner,
to participate in a particular regulated market where service is
provided directly to customers, or where the government is the
(sole) buyer. The private party often has the obligation to mobi-
lize financing, build or rehabilitate and operate the infrastructure
in exchange for a fee (or off-take tariff) over the concession
period. The public authority’s primary role is regulatory although
it might also provide reimbursable financial support, a subsidy in
cash or in kind, or guarantees. Concession agreements are long
term often 20 30 years to allow for amortization of the
capital invested. Post-concession, the asset is either transferred to
the public authority or retained.3 Ownership of assets over the
concession period may lie wholly (or in part) with either of the
partners. In build, own, operate and transfer (BOOT) or build,
operate and transfer (BOT) concessions, for example, the public
authority owns the assets, but transfers ownership to the private
operator over the concession period. This transfer of ownership
or control rights incentivizes the private partner to undertake
investment (Grimsey & Lewis, 2007). In a build-lease-transfer
(BLT), the private partner leases the asset from the state which
owns it for the duration of the contract, although the actual
initial financing may be provided by either party.
In availability contracts the private party mobilizes equity
and debt financing, designs and builds the assets, and post con-
struction, manages the assets to ensure availability of the services

3
Retained assets are often subsequent disposal through other forms of
exit, e.g. sale to other investors.
 Infrastructure PPPs in Africa 49

in exchange for a fee paid by the public authority. The public

authority maintains ownership and control of assets, as well as
revenues generated by the asset, over the contract period (typi-
cally 20 years or more). The ‘design’ function is typically allo-
cated to the private party, transferring some preparatory stages
of the project cycle to the private partner.
Joint ventures involve co-ownership (through capitalization)
of the service provider by a public entity and a private partner(s).
The joint venture could be in the form of a special purpose vehi-
cle (SPV) created specifically to undertake the project, or an
established corporation that undertakes more than one opera-
tion. They can therefore have a limited life in the case of SPVs, or
be an open-ended partnership. A public authority still needs to
provide regulatory oversight. This means that the regulating
authority and the public partner in joint venture must be inde-
pendent in order to minimize conflict of interest.
Given the fluidity with which the term ‘PPP’ has been applied
in the literature, it is befitting to state the market arrangements
excluded from the definition of PPPs in this chapter. The chapter
excludes full divestiture, which involves complete transfer of both
ownership of assets and responsibility for service delivery to the
private party. It also excludes design and build, or turn-key, con-
tracts whereby the private party is not involved beyond the con-
struction phase of the infrastructure. Finally, it excludes
merchants, whereby assets are built by a private sponsor in a lib-
eralized market in which the government provides no revenue
guarantees, and the private developer assumes construction,
operating and market risk for the project.

RATIONALE FOR PPPS

The typical (theoretic) argument for government involvement in
service provision is to correct market failure. In basic terms, mar-
kets fail when perfect competition is not possible, externalities
exist and the goods being provided are public goods. By design,
some segments of infrastructure markets operate as natural
monopolies, i.e., from a long-run average cost perspective, pro-
duction is most efficient when concentrated in a single producer.
Others are naturally oligopolistic, allowing for only a handful of
players at a time. Similarly, ‘exclusion’ in specific sectors is inhib-
ited by the public good nature of the infrastructure services, or
public negative externalities associated with exclusion (particu-
larly in social sectors). These characteristics largely explain the
50 EMELLY MUTAMBATSERE

historic involvement of the state in infrastructure markets, and

justify the need for the first ‘P’ in PPPs.4
Several reasons also exist for engaging the private sector
using a PPP structure in infrastructure: First, a PPP in which the
private partner brings capital is a powerful tool for off-balance
sheet financing of public infrastructure. A public service can be
provided sooner than when a liquidity-constrained public author-
ity has to mobilize these resources. Second, implementing infra-
structure projects sometimes requires capacities not available in
the public sector, such as the expertise to procure the best con-
tractors, mobilize financing at least cost and monitor implemen-
tation to avoid cost overruns. When properly structured, a PPP
provides a framework to optimally allocate risks to the partner
best placed to absorb the risk, which improves the quality and
efficiency (cost-effectiveness) of the transaction. Third, perfor-
mance enhancement is compatible with profit maximization
when either the contractual arrangement allocates performance
gains (from developing, maintaining or operating an asset) to the
private party, through performance-based management contracts,
or the private party is a residual claimant (Engel, Fischer, &
Galetovic, 2010). Therefore, PPPs can be used to maximize avail-
ability and reliability, and to ensure sustainability.
It follows that both the rationale for use of PPPs and the
extent of involvement of the public authority differs from one
infrastructure industry to another, depending on its inherent
characteristics and objective for engaging private partners.
Figure 1 illustrates how profitability and market failure consid-
erations affect both the likely source of financing and the degree
of public involvement.
It is worth highlighting some of the factors that would reduce
or eliminate the benefits expected from PPPs. First, ‘government
failure’ may lead to a socially inefficient allocation of resources,
or a failure to address the market failure being targeted. Second,
only a subset of PPP arrangements can be considered to meet the
capital mobilization objective, and within this subset, different
levels of risk of failure to capitalize also exist. Third, efficiency
gains could be erased by misestimating or misallocating risks
within the PPP, as this could lead to costly remedial actions.

4
It is understood that governments have also intervened in markets for
other reasons, for example, addressing systematic irrational behaviour
by producers or consumers, or for distributive justice (Stiglitz, 2008).
 Infrastructure PPPs in Africa 51

Low
Decreasing
role of public
authority ICT
Power generation
Port terminal
Market Failure

Airport terminal

Increasing
Road private
Investments

High

Low Commercial Viability High

Figure 1. Different Characteristics of Infrastructure Services. Source: Authors.

Fourth, private enterprises that are residual claimants cannot

always be relied upon to ensure consistent delivery of services,
especially if operating in industries with high and fixed operating
costs (e.g. the airline industry), where cash flows can be managed
by reducing availability. Finally, although PPPs can foster align-
ment of incentives between partners through careful sharing of
risks and rewards, the possibility for opportunistic behaviour is
not fully eliminated. This explains the need for formal rights to
terminate contracts, as well as soft features such as trust, commit-
ment to a common cause and reputation, in solidifying contract
agreements. Some of these factors explain the performance of
PPP contracts discussed in Section ‘Performance’.

Salient Trends
This section uses projects data from the World Bank Private
Participation in Infrastructure (PPI) project database over the
period 1990 and 2013, to analyse trends in the use of PPPs to build
or manage infrastructure assets in Africa. The focus is exclusively
on those projects that adopted a PPP procurement arrangement as
defined in Section ‘Definitions’. Four hundred and fifteen projects
reached financial close over the assessment period.
52 EMELLY MUTAMBATSERE

Cumulative growth: Based on this data set, committed invest-

ments5 of a PPP nature in Africa are overall variable from 1 year
to the next, and exhibit a mild positive trajectory over time, in
contrast to a strong exponential growth in the number of projects
(Figure 2).

Geographic reach: Investment flows are dominated by three

countries South Africa, Morocco and Nigeria which collec-
tively account for 54% of total commitments. By contrast, the
number of projects spans 48 African countries, of which a quar-
ter concluded PPP contracts entailing little to no investment com-
mitments (Figure 3).

Sectoral trends: The energy sector has driven growth in PPP com-
mitments over the past two decades, but although on a growth
trend, commitments to the sector have been volatile from 1 year
to the next (Figure 4 and Table 1). ICT PPPs accounted for the
second largest investment commitments from a relatively small
number of projects, and investment flows appear to have reached
their peak around 2006. The transport sector, though accounting
for the second largest number of projects, had lower investment
commitments than ICT, which are growing at a pace second only
to energy sector investments, but also similarly volatile from year
to year. In water and sanitation, investments involving the pri-
vate sector remain very limited.

Sub-sector trends: Most energy sector investments were greenfield

power generation projects sponsored by independent power pro-
ducers (IPPs), which accounted for 65% of total commitments to
the energy sector (Figure 5). In ICT, 92% of projects were
brownfield investments, and involved network expansion
through partial divestiture of telecoms utilities involved in provi-
sion of fixed access, mobile access and long distance lines. In
transport, seaport terminals mostly rehabilitation and opera-
tion of brownfield assets, and greenfield seaport developments
attracted the lion’s share of projects and investment commitments

5
Committed investment is not to be confused with actual expenditure
which is staggered over a number of years according to the construction
scheduled of the operation funded. Moreover, some commitments never
materialize into actual expenditure in the event of failure to reach agree-
ment on the contract between the public authority and the private sec-
tor, or in the event of a cancellation of a non-performing contract.
 1,600 450
Cumulative Investments, USD Billion

1,400 400

350
1,200

Number of Projects
300
1,000
250
800
200
600
150
400
100

Infrastructure PPPs in Africa

200 50

- 0
1985 1990 1995 2000 2005 2010 2015

Africa All Developing Regions Total # of Projects, Africa

Figure 2. Cumulative Investment Commitments, 1990 2013. Source: Authors using PPI data.

53
 Total commitments, USD billion

10

15

20

25
0

5
South Africa
Morocco
Nigeria
Algeria
Egypt
Figure 3. Total Investment Commitments by Country. Source: Authors using PPI data.

Tunisia
Ghana
Senegal
Uganda
Kenya
Côted'Ivoire
Tanzania
Mozambique
Cameroon
Zambia
Congo
Togo
Sudan
Mali
Zimbabwe
Benin
Mauritius
Gabon
Djibouti
Liberia
Angola
Rwanda
Guinea
Chad
Mauritania
Namibia
CapeVerde
SierraLeone
Madagascar
Botswana
Lesotho
Burkina Faso
Niger
STP
Malawi
Gambia, The
Seychelles
Somalia
Ethiopia
Comoros
CAR
DRC
Guinea-Bissau
0

10

20

30

40

50

60

Number of projects

EMELLY MUTAMBATSERE 54
 (a)
250

Number of Projects
Energy
200
Transport
150

100
Telecoms
50 Water and sewerage
0
- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

(b) Investment Commitments, USD million

10
Invetsment Commitments, USD Billion

Infrastructure PPPs in Africa

6

-
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1990
1991
1992
1993
1994
1995
1996

(2)
Telecom Energy Transport Water and sewerage
Poly.(Telecom) Linear (Energy) Linear (Transport) Linear (Water and sewerage)

Figure 4. (a) Total Investment Commitments by Sector, 1990 2013. (b) Total Investment Commitments by Sector, 1990 2013. Source: Authors

55
using PPI data.
56 EMELLY MUTAMBATSERE

Table 1. Infrastructure PPPs, 1990 2013 (USD Million).

Energy Transport Water and Telecom
Sewerage

Total cumulative 41,362 22,776 3,044 37,564

commitments
Total number of projects (#) 189 126 45 55
Mean (annual) 1,723 949 127 1,565
Median (annual) 1,251 464 0 1,275
Min. (annual) 0 0 0 0
Max. (annual) 8,910 4,647 874 4,086
Standard deviation (annual) 2,009 1,291 235 1,332
Average annual growth 122.74 103.93 16.28 114.19
Mean (projects with 225 218 152 238
investment)
Median (projects with 109 63 123 39
investment)
Min. (projects with 1 0.5 3.4 0.2
investment)
Max. (projects with 2,300 3,483 475 2,250
investment)
Standard deviation (projects 330 498 135 485
with investment)

(Figure 6), followed by airport runways and terminals (manage-

ment, rehabilitation and/or expansion of brownfield assets).
Road and railroad PPPs were limited, and typically involved
transfer of existing assets to private partners for management,
rehabilitation and/or expansion. Two-thirds of the PPP contracts
awarded in the water sector entailed transfer of water utilities
including sewerage systems to the private sector through manage-
ment contracts or leases. The minimal investment commitments
to the water sector benefited mostly greenfield potable water
treatment plants.
PPP types: The most common type of PPP as measured by vol-
ume of commitments is partial divestiture (commonly applied
in the telecoms sector), followed by build-own-operate (com-
monly applied to the energy sector) (Figure 7). Management con-
tracts, rentals, leases and build-lease-transfer concessions
collectively account for 31% of the total number of projects but
only 25% of total investment commitments. Management
 Value, USD billion

10

15

20

25

30
0

5
Electricity generation
Figure 5. Investment Commitments in the Energy Sector, 1990 2013. Source: Authors using PPI data.

Natural gas transmission

Electricity distribution for

Water & sewerage

Natural gas distribution &

transmission

Electricity distribution
generation & transmission
Electricity distribution
generation & transmission for
Water without sewerage
Electricity generation for
Water treatment plant

Electricity generation for

Natural gas transmission
Value

Electricity distribution &

transmission

Electricity transmission
Count

Electricity distribution &

generation

Electricity distribution

Natural gas distribution

Electricity distribution
generation & transmission for
Water & sewerage
0
20
40
60
80
100
120
140
160

Number of Projects

57 Infrastructure PPPs in Africa

 Value of commitment, USD billion

10

12

14
0

8
Figure 6. Investment Commitments in the Transport Sector, 1990 2013. Source: Authors using PPI data.

Roads_Bridge

1
5
Airports_Terminal

19
Airports_Runway and terminal

Railroads_Fixed assets

Value
Railroads_Fixed assets and freight
2
Roads_Bridge and highway
1

Count
11

Roads_Highway
11

Railroads_Fixed assets, freight and

passenger

Seaports_Terminal 63

Seaports_Channel dredging and

terminal
4

Railroads and Seaports_Freight and

1

passenger Terminal

Railroads_Freight
3

Railroads_Freight and passenger

1

Railroads_Fixed assets and

1

passenger
0

10

20

30

40

50

60

70

Number of projects

EMELLY MUTAMBATSERE 58
 40 120

Investment commitments, USD Billion

35
100

Number of projects
30 Telecom
80
25 Water and sewerage
20 60 Transport
15 Energy
40
10 # of projects
20
5
0 0
BOT&BOOT

BROT

RLT

Lease
ROT

BLT
Management Contract
BOO

Rental
Partial Divestiture

Infrastructure PPPs in Africa

Figure 7. Total Commitments by PPP type, USD Billion. Notes: ROT is rehabilitate, operate and transfer. RLT is rehabilitate, lease or rent and
transfer. BROT is build, rehabilitate, operate and transfer. BLT is build, lease and transfer. BOO is build, own and operate. BOT is build, operate and
transfer. BOOT is build, own, operate and transfer. Source: Authors using PPI data.

59
60 EMELLY MUTAMBATSERE

contracts are widely applied to the water and sanitation sector

where they contribute 42% of the total number of projects with-
out financial commitments; and to a lesser extent, in the trans-
port sector where they are employed in 14% of the projects with
minimal investments. Rentals and leases are mostly used in water
and sanitation (22% of total number of projects in the sector)
where they generally do not involve any investment commit-
ments, and to a smaller degree in the energy sector (14% of total
number of projects in the sector).

Performance
Most infrastructure PPP projects in Africa that reached financial
close between 1990 and 2013 were in operation phase as on July
2015, with 5% cancelled, and 3% in distress (Figure 8). The
number of cancelled PPP projects, or ongoing projects in distress,
has decreased significantly since the 1990s, a moderate hike being
observed on contracts awarded in 2007, which failed to reach
financial close. The overall portfolio has a 7% contract cancella-
tion rate, of which about a third were re-awarded, bringing
effective cancelations down to 5%. This section provides a meta-
analysis of the evidence from project assessments for a sample of
83 projects.

ENERGY SECTOR PPPS

Projects of a PPP nature in the energy sector mirrored the average
performance of infrastructure PPPs in terms of proportion of pro-
jects cancelled or projects in distress, at 5% and 3% of the pro-
jects in the sector, respectively. The cancellation rate is lower
than those reported in earlier studies,6 in line with the trends
observed in Figure 8. The list of cancelled and distressed projects
include a methane gas power concession awarded to Kibuye
Power in Rwanda, structured as a 32-year build, own and oper-
ate (BOO), which was cancelled; a 20-year build, rehabilitate,
operate and transfer (BROT) concession for rural electrification
awarded to Energia de Mocambique Lda (ENMo) in 2004,
which was also cancelled; and a 20-year BROT concession

6
For example, Vagliasindi and Nellis (2009) reported a 15% cancella-
tion rate on a sample of 74 energy sector projects involving the private
sector in Sub-Saharan Africa.
 (a) 100%

80%

60%

40%

20%

0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Operational Construction Concluded Distressed Canceled
(b)

Infrastructure PPPs in Africa

200
Number of projects

150 Canceled
Distressed
100
Concluded

50 Construction
Operational

Transport Energy Telecom Water and sewerage

Figure 8. (a) Status of PPP Projects by Year of Financial Close, 1990 2013. (b) Status of PPP Projects by Sector. Source: Authors using PPI data.

61
62 EMELLY MUTAMBATSERE

awarded to Societe d’Energie et d’Eau du Gabon (SEEG) in Gabon

in 1997 to rehabilitate the electricity system for water and sewer-
age, which is in distress. Factors affecting project performance
include disputes over the sharing of project costs in operations
where pre-project costs are covered by the private partner, and fail-
ure to fully meet investment targets set out in concession agree-
ments. Only one of the cancelled concessions had been re-awarded
by end of 2013. The rest of the projects were operational or still in
the construction phase, and of the operational contracts 5% had
been re-awarded following the conclusion of a contract with
another private operator, whereas 6% were contract renewal.
Energy sector PPPs were employed mostly to relieve govern-
ments of the large investment needs for the sector, explaining the
choice of models involving private ownership (full or partial) of
the assets. PPPs were also used to improve efficiency and effective-
ness of power utilities, most of which were failing to recover costs
or meet electrification targets. Market reforms have enabled the
conclusion of nearly two hundred PPP projects, three-quarters of
which were power generation projects. A cumulative 17,000
megawatts (MW) of new power generation capacity is expected
to result from these investments, of which 64% (10,800 MW) has
reached operational stage. This accounts for roughly 7% of the
current installed generation on the continent, and 17% of the esti-
mated capacity gap.7 PPPs’ contribution to meeting the power
generation capacity gap has been held back by a number of out-
standing challenges in the sector including inadequate investment
in project preparation; and other challenges around engaging
equity partners with developing country experience, access to
low-cost financing, security of revenue streams and the availabil-
ity of credit enhancement and other risk management measures.
PPP contracts awarded to vertically integrated power utilities
have contributed to enhancing performance by improving reve-
nue collection and cost efficiency. According to Ghanadan and
Eberhard (2007), the transfer of the Tanzanian power utility
TANESCO to private sector manager NETGroup, through a
4-year management contract awarded in 2002, resulted in

7
An average of 1,200 MW of new generation capacity was added over
the period 1990 2013, against an estimated need of 7,000 MW of
additional generation capacity per year required to meet suppressed
demand, keep pace with projected economic growth and provide addi-
tional capacity to support the rollout of electrification (Rosnes &
Vennemo, 2008).
 Infrastructure PPPs in Africa 63

significant improvements in utility operations and a near dou-

bling of revenues. Similarly, in Senegal, following the award of a
BROT concession to AES-SONEL in 2001, a record amount of
annual revenues (US$200 million) had been achieved by 2003
(Pineau, 2005). The rehabilitate, operate and transfer (ROT) con-
cession awarded to Compagnie Ivoirienne d’Electricite (CIE) in
Côte d’Ivoire is also credited for the 14% reduction in distribu-
tion losses and 60% reduction in average outage duration
achieved by 1999 (Foster & Pushak, 2009).
However, the contribution of PPPs to meeting electrification
targets has been minimal. Most countries adopted the standard
reform model which prescribed industry unbundling and the
introduction of competition and private sector participation in
contestable segments of the market. Few countries completely
unbundled their electricity value chains; fewer allowed private
sector involvement in transmission and distribution. As a result,
only 4% of the energy sector PPP projects involved a distribution
and/or transmission function. These projects are expected to add
about 2.7 million new connections, 4.7% of the target additional
connections required to meet consumption needs, as estimated by
Rosnes and Vennemo (2008). It is evident that the volume of pri-
vate capital flowing through transmission and distribution PPPs
remains low and selective across developing regions, with green-
field projects dominant in the transmission segment of the market
(Vagliasindi, 2012). Developing regions that have attracted a
larger number of PPPs in transmission, e.g. Latin America and
the Caribbean, have done so mainly through renewable energy
projects, where transmission lines are included as ancillary infra-
structure required to link power plant to the grid. On the other
hand, distribution PPPs are more strongly restricted by the state’s
monopoly on power sales to end users.
Projects aimed at improving generation capacity could also
have, as an objective, increasing electricity access. However, this
outcome is often indirect and not easily documented. Based on
the capacity required to meet the target electrification rates
discussed above, the electricity generation capacity added through
PPPs had the potential to support up to 8 million new connec-
tions. The extent of realization of this potential depends on the
purpose of the new generation plants (whether to increase access,
or increase peak load capacity), the quality of transmission and
distribution infrastructure, as well as the ease and cost of new
connections. These issues are not analysed in this chapter.
64 EMELLY MUTAMBATSERE

TRANSPORT SECTOR PPPs

Most transport sector projects were either operational or in con-
struction phase, with only five cancelled and six in distress. The
cancellations included projects in rail (2), airports (2) and sea-
ports; all brownfield operations structured as ROT, management
and lease contract, or divestiture. The cancelled contracts were
all awarded in the early phase of the learning curve pre-2000.
The distressed contracts are mostly in the railway sub-sector,
located in Zambia, Mozambique, Kenya and Uganda, and were
awarded between 2003 and 2006 on brownfield projects. Two
projects involving airport and seaport terminals in Nigeria were
also among the distressed projects in the latter half of the assess-
ment period.
Transport sector reforms in Africa reflect the challenge of
involving private partners in sectors that are largely non-commercially
viable (e.g. roads), or those considered strategic for national
security reasons (such as seaports and airports). Road infrastruc-
ture services have traditionally been provided free of charge, with
users only paying vehicle licensing fees and fuel levies to partly
cover maintenance. The use of tolling to fully recover capital
costs is still limited, and only a few countries (e.g. South Africa
and Mozambique) have long-standing tolling systems involving
the private sector. Similar systems are also emerging in Senegal
(the new Dakar toll road) and Cote d’Ivoire (Henri Konan
Bédié bridge). Road PPPs have been limited by the public good
characteristics of road infrastructure, and the fact that in most
African markets, traffic volumes are not large enough to allow
countries to recover all capital and operation costs at affordable
toll fees. Thirteen PPPs were recorded in the road sector in Africa
over the past two decades. However, PPPs in roads have recorded
relatively better performance than other transport sector PPPs
on measures such as number of concessions cancelled or
contracts in distress. Only the Côte d’Ivoire concession was
re-awarded following failure to reach financial close at initial
contract awarded, explained by the civil unrest experienced in
the early 2000s.
In the rail sector, PPPs have been widely used to correct
operational inefficiencies, and to build new railroads associated
with seaport developments. Twenty-one such operations were
recorded between 1990 and 2013. Concessions have generally
improved operational performance through increased freight
volumes and enhanced efficiency (Bullock, 2009). On other
 Infrastructure PPPs in Africa 65

measures infrastructure investments, in particular the conces-

sion model has performed below expectations. This is explained by
unrealistic expectations as to the concessionaire’s capacity to make
major capital investments, post-concession disputes related to con-
cession fees and duration, failure by governments to adequately
compensate concessionaires for unprofitable passenger services,
poor enforcement of regulations such as load limits on roads
which generates unfair competition from roads, among others
(Mutambatsere, Nalikka, Paal, & Vencatachellum, 2013). These
factors partly explain the larger share of rail PPP concessions
in distress, cancelled or renegotiated relative to other transport
sector PPPs.
Most African ports are still public assets. However, between
2000 and 2013, an increase in private sector participation
through PPP arrangements including leasing port assets, subcon-
tracting port services such as cargo handling, and concessioning
new port terminals, was evident in about half of African coastal
countries. A total of 67 PPPs involving port infrastructure were
recorded between 1990 and 2013, of which 40% were leases,
rentals or management contracts on existing terminals, 34%
were BROT or ROT on existing terminals and channels, and the
rest were greenfield terminals structured as BOT. PPPs have suc-
ceeded at mobilizing capital for expansion of the existing infra-
structure and development of new assets, as well as improving
efficiency of logistics. Private sector involvement is still con-
strained by vested government interests in seaports which have
either prevented private sector participation, or resulted in can-
cellation of a number of awarded contracts. Government regula-
tion of port tariffs has also been a bone of contention in a
number of contracts.
In air transport, 24 PPPs spanning 15 countries were
recorded between 1990 and 2013, of which three-quarters were
brownfield runways and terminals structured as ROT, BROT,
management contract or partial divestiture. Forty per cent of the
contracts (including three BOTs) were awarded in the 1990s as
part of broader parastatal reforms undertaken across the conti-
nent. It should be noted that airport and airline operators
(including some concession holders) remain quasi-public, with
majority share held by the state. There are few cases of full dives-
titure involving mostly secondary airports (e.g. Kruger Park
Gateway Airport in South Africa); and several cases of subcon-
tracting of landside services such as baggage handling. However,
specific strategic functions such as navigation and air traffic
66 EMELLY MUTAMBATSERE

control remain within the state’s purview. The private sector’s

participation is also undermined by the fact that profitability of
airport infrastructure remains a challenge, given the reliance on
carrier tariffs, and non-payment of these fees by carriers with
weak balance sheets.

ICT SECTOR PPPs

In ICT, the PPP model was adopted far less than fully private
procurement (a ratio of 1:4), and entailed mostly partial divesti-
ture of previously state-owned telecoms utilities or greenfield
joint ventures with public utilities in fixed and mobile telephone
assets. In contrast, purely private operations were mostly stand-
alone greenfield mobile telephony operations. Seventy per cent of
African countries recorded at least one PPP in telecoms in the
past two decades. However, the performance of these contracts
has not been perfect; the largest number of contract cancellations
and contracts in distress was observed in ICT (10 out of 55 pro-
jects). Three contracts were re-awarded after cancellation, while
only one was renewed. The troubled contracts were partial dives-
titures (70%) and greenfield operations structured as BOO
(20%). The cancelled contracts include partial divestiture of
Sotelgui in Guinea in 1995, Ghana Telecom in 1996, Nitel in
Nigeria in 2006 and Gamtel in Gambia in 2007, as well as the
first and second attempts at partial divestiture of Rwandatel in
2005 and 2007, respectively.
Some of the issues explaining these cancellations include
failure by the winning bidder to meet the capital injection dead-
line, failure of the PPP to compete in increasingly competitive
telecoms markets, and failure to achieve rollout targets for fixed
telephone lines. Overall, the introduction of the private sector
has significantly changed the structure of the telecoms industry
and succeeded at increasing market penetration for telephone
services. The effect on prices, on the other hand, has been gener-
ally weaker than expected, a result of exclusivity benefits
afforded to private operators of ICT assets including those with
PPP contracts, the perpetuation of state-owned enterprises in
some market segments, as well as generally weak regulatory
frameworks and capacities. Moreover, ICT PPPs have not been
as successful at expanding access to internet and related services,
and the cost of internet access remains prohibitive.
 Infrastructure PPPs in Africa 67

WATER SECTOR PPPs

Unlike other developing regions where long-term instruments
such as build, rehabilitate, operate and transfer were employed to
rehabilitate infrastructure and expand service, African govern-
ments have been less keen to introduce private sector participa-
tion in the water sector. In Africa, the difficulties in implementing
specific reforms necessary to employ a wide range of PPP options,
such as tariff reforms, as well as the civil resistance to ‘privatiza-
tion’ of service delivery, explain the preference for management
contracts and leases. These contracts performed only slightly
below average: 7% of the contracts signed between 1990 and
2013 were cancelled, none of the ongoing projects were in dis-
tress at the end of this period and 11% of the contracts had been
renewed. (This excludes contracts involving electricity generation,
transmission and distribution for water, with or without sewer-
age, whose performance was well below par with a 29% cancel-
ation rate and about 12% of the contracts in distress.) Côte
d’Ivoire, for example, in 2008 renewed for the second time the
management and lease contract with Societe Distribution d’Eau
de Côte d’Ivoire (SODECI), which had succeeded at increasing
by nearly 100-fold the number of users served since taking over
supply in 1987. Senegal’s PPP arrangement with the private oper-
ator Senegalaise des Eaux (SDE) for urban water supply and sew-
erage was also considered overall successful leading to contract
renewals. Similar conclusions were reached concerning the on-
going 30-year BROT concession awarded to Greater Nelspruit
Utility Company in 2000 by the Mbombela Local Municipality
in South Africa to manage its water utility. However, in the water
sector, PPP contracts have at times led to fiscal obligations higher
than originally expected. In the Mbombela concession, for exam-
ple, a new policy stipulating a minimum ‘free basic service’ level
of water supply led to a contract amendment committing the gov-
ernment to increase the subsidies received by the concessionaire,
while exempting the concessionaire from further investment com-
mitments and important annual fees (Bender & Gibson, 2010).

Considerations in PPP Application

The discussion above confirms that while PPPs can contribute to
meeting specific infrastructure service delivery objectives, they are
no panacea. This section discusses a number of factors to
68 EMELLY MUTAMBATSERE

consider before and during implementation of projects, to

enhance their relevance and efficacy.

MACROECONOMIC CONSIDERATIONS
For the same reasons that general foreign direct investment
responds to stable macroeconomic environments, PPPs fare better
in countries with low inflationary pressures, stable exchange rates
and investor-friendly foreign exchange management policies.
Private capital investments into infrastructure assets are mostly
foreign currency based, given the need to source capital equip-
ment from foreign markets. However, revenue streams are typi-
cally local currency based, introducing foreign exchange risk for
private investors. In addition, because the private partner is often
foreign or would have accumulated foreign currency debt to
facilitate its participation in the transaction, currency convertibil-
ity and transferability are important considerations. For related
reasons, so is inflation. In African infrastructure PPPs, currency
risk is often managed through conditions within the PPP con-
tract, such as indexing tariffs to foreign currency, although other
risks (foreign exchange availability and currency convertibility)
remain unmitigated. Other methods of mitigating foreign
exchange risk include financing capital investments in local cur-
rency, currency hedging, government exchange rate guarantees,
local currency guarantees and devaluation liquidity schemes.
Infrastructure PPPs in Africa also normally involve govern-
ment guarantees to secure a minimum revenue stream for the
private partner or backstop the payment obligations of the par-
ticipating public authority. The relationship between these guar-
antees and fiscal sustainability is not easily determined, and
guarantees are not always (or easily) accounted for on fiscal
balance sheets. Although guarantees facilitate private invest-
ments, which creates fiscal space for core public sector obliga-
tions, they are also contingent liabilities that both limit fiscal
space, and can translate into fiscal revenue outflows. Specifically,
sovereign guarantees can become a major fiscal cost when
applied to sectors that do not recover costs, such as renewable
energy IPPs which in a number of countries in Africa are still pro-
duced at a generation cost that exceeds the end-user tariff.
Contingent liabilities are hidden in some cases, making it difficult
to factor the into debt sustainability considerations.
However, failure to disclose, or prepare for, contingent liabil-
ities can result in large and unexpected spending pressures.
 Infrastructure PPPs in Africa 69

A quantification of PPP guarantees in the road sector in Chile,

for example, indicated net contingent liabilities of at least 0.25%
of GDP with a maximum exposure of 5% of GDP (Cebotari
et al., 2009). Another study conducted in 2004 covering pre-EU
accession countries showed that exposure to explicit guarantees
(those legally binding governments to take on payment obliga-
tions, should specific events occur) accounted between 5.4%
(Hungary) and 22% (Malta) of GDP as on the end of 2002
(European Commission, 2004). While systematic data on guaran-
tee calls is limited, anecdotal evidence shows government payouts
on failed PPPs in Australia, Hungary, Mexico and the United
Kingdom of up to 0.5% of GDP on a single project
(Organization for Economic Co-operation and Development and
International Transport Forum, 2008); and 2% of GDP for obli-
gations in power, telecoms and toll roads in Columbia between
1990 and 2004 (Cebotari et al., 2009). To manage this fiscal
risk, some African countries have opted to purchase risk guaran-
tees at concessional terms from development finance institutions
to support infrastructure PPPs (e.g. Kenya), while others require
commercial autonomy of state-owned enterprises, to minimize
the need for such guarantees (e.g. South Africa).

POLITICAL RISK
The state is an active partner in PPPs, which means that invest-
ments respond to sovereign risks or risk perceptions. Sovereign
risk ratings allocated by rating agencies8 indicate the credit
worthiness of both the state (which is often a guarantor of the
payment obligations of the participating public authority) and
the state-owned entities involved in PPPs. They also provide an
indication of the extent of political risk associated with the busi-
ness environment, including the risk of policy reversals, nationali-
zation of infrastructure assets, breach of contract and political
force majeure. Other important risks that could fall into this cate-
gory include land purchase and site risk (in case the land required
for infrastructure development is state-owned or already occu-
pied), as well as regulatory risk, in particular, the risk of change
of law. Because of the long-term nature of PPPs, political risks or
risk perceptions have a strong bearing on bankability.

8
Thirty African countries were rated by one or more of three main
rating agencies: Moody’s, S&P and Fitch in 2016.
70 EMELLY MUTAMBATSERE

Political risk is typically allocated to the state which is con-

sidered better able to manage this risk. Governments have the
option to mitigated political risk through market-based politi-
cal risk insurance, instruments such as the partial risk guaran-
tee (PRG) offered by the African Development Fund and
International Development Association, or political risk insur-
ance offered by the Multilateral Investment Guarantee Agency.
Certain political risks are also managed through provisions
within the PPP contract, for example, use of a take-or-pay con-
tract to manage the risk of failure by a public partner to hon-
our payment obligations. At times, the private partner will
purchase additional cover in case of limited trust of the state’s
capacity to manage this risk, or as a method of lowering the
cost of debt. Similar to other sovereign guarantees discussed
earlier, guarantees aimed at mitigating political risk (such as
the take-or-pay agreement) also constitute contingent liabilities
for the state. One advantage of using government procured
political risk management instruments, such as PRGs, is that
they also incentivize governments to implement reforms that
address performance risk, to minimize the likelihood of the
guarantee being called.

COMMERCIAL RISK
PPPs structured as project finance operations, for example,
BOTs, often seek non-recourse debt (i.e., debt guaranteed only
by project cash flows) which means that the availability and
cost of financing is highly sensitive to perceived commercial
risks. This includes performance or price risk, resource risk,
demand risk and revenue risk, among others. Commercial risk
can be managed through instruments such as government guar-
antees or credit risk insurance. Given the long-term nature of
infrastructure debt, private partners in PPPs could also choose
to purchase cover against interest rate risk. In the event that
long-term local currency is mobilized, instruments such as the
Currency Exchange Fund can be used to provide specialized
cover against interest rate risks. It is worth noting though that
while risk management instruments improve the viability of
projects, costs could be prohibitive if risk perceptions are over-
state, or the expected cost from a risk materializing exceeds the
cost of mitigating it. Therefore, a good project risk analysis is
imperative.
 Infrastructure PPPs in Africa 71

LEGAL, POLICY AND INSTITUTIONAL FRAMEWORKS

It has already been shown that the rise of infrastructure PPPs in
Africa is closely linked to sector reforms that were implemented
across the continent throughout the 1990s. These reform pro-
grammes generally followed a standard model, starting with the
legislative removal of monopoly powers from public utilities, fol-
lowed by unbundling or divestiture of the utility, and introduc-
tion of regulated competition. However, for a variety of reasons,
many countries did not complete the reform protocol across all
sectors. Some sectors reverted to public ownership after failing to
sustain PPP contracts, while others transitioned quickly to private
sector dominance even with incomplete reforms. For example, a
private sector-led growth of the mobile telephony industry in
most African countries took off after market liberalization, and
regulatory frameworks matured as the need for better oversight
on the sector emerged.
However, studies have shown that at the minimum, the
policy environment should be transparent and predictable, with
as few legislative gaps as possible, to improve efficiency in PPP
procurement and success of contracts (Asian Development Bank,
2008; Gratwick & Eberhard, 2008; Mukasa, Mutambatsere,
Arvanitis, & Triki, 2013; Nambu, 1997; Naidu & Lee, 2007).
While in some cases, the conclusion of PPP contracts has gone
ahead of legislative reforms (normally backed by strong political
support and leadership), this increases transactions costs, the risk
of corruption, risk of contract renegotiation and the likelihood
that governments will commit to costly options given their infe-
rior experience and knowhow compared to private partners. In
such cases, seeking the assistance of development finance institu-
tions that can act as honest brokers is important as a way of not
only mitigating these risks but also mobilizing assistance to build
a supportive policy and legislative environment for future opera-
tions. This model was adopted in Burkina Faso where the first
concession for a commercial solar power plant was awarded
ahead of the renewable energy legislation, but with the support
of development partners including with contract reviews and via-
bility gap financing (Eaglestone Securities, 2014).
To establish an enabling policy environment for PPPs, an
audit of policies, laws, regulations and legacy contracts that
directly or indirectly linked to the operations in the specific sector
of interest, is required. This audit gives an initial indication of
which PPP models can be undertaken with no or limited reforms,
72 EMELLY MUTAMBATSERE

therefore also determines the sequencing of reforms. In most

cases, new legal instruments are required to facilitate new pro-
curement models. Reforms to enable PPPs can also include
restructuring and redefining mandates of existing institutions, as
was observed in Kenya and Uganda to facilitate the concession-
ing of the state-owned railway corporations; or scrapping prohib-
itive statutory instruments, as was done in Zambia to facilitate
the conclusion of power purchase agreement in the country’s
first IPP.9
Experience has shown that the performance of PPPs depends
to a large extent on the applicability of the chosen model within
the existing policy framework, political commitment and com-
mercial autonomy of the sector. According to Skilling and Booth
(2007), outsourcing is the least demanding and can be success-
fully executed with moderate government capacity for contract-
ing, management and analysis, even when political commitment
to PPPs is low and the regulatory environment is not very strong.
Management contracts could also be implemented successfully
with only moderate government capacity, political commitment
and regulatory frameworks. This is because this type of PPP
tends to be short term, providing either party an early exit option
if the arrangement does not work. On the other hand, con-
cessions (such as BOOTs) require high levels of political com-
mitment, a strong regulatory environment, low information
asymmetry, high government capacity and cost recovery, to suc-
ceed. Concessions often require the private partner to fund infra-
structure investment, which reduces exit flexibility. They also
often involve direct participation of a state actor as an off-taker
of the output produced, increasing exposure to political risk.
Lease agreements are also demanding in terms of government
capacity for contracting, reliability of the regulatory framework,
and scope for cost recovery, although the risk for political inter-
ference is generally lower than in concessions.

9
The statutory instruments were SI 33 which prohibited the quoting,
paying, demanding or receiving foreign currency as legal tender for
goods, services or any other domestic transactions; and SI 55 which
empowered the Bank of Zambia to monitor forex inflows, outflows and
international transactions. These instruments delayed the conclusion of
the Itezhi Tezhi hydropower plant PPA, which had the standard USD-
index off-take tariff.
 Infrastructure PPPs in Africa 73

LOCAL CAPACITY
PPP structuring requires specialist skills to undertake feasibility
studies; arrange financing; draft terms of reference for contrac-
tors, bidding documents, and concession agreements; and negoti-
ate contracts. There is also a need to retain expertise to monitor
contract implementation and compliance with performance tar-
gets. Strong administrative capacity is required to ensure trans-
parency in tendering, while effective regulatory capacity and
regulatory autonomy is important to safeguard government and
consumer interests. African governments at the beginning of the
learning curve with respect to PPPs generally do not have all
these skills in the public service, and must seek complementary
external expertise. The more complex the PPP structure chosen,
the more extensive the advisory services required. Transaction
advisors are engaged at different stages of project development as
and when their support is required, however, it is important to
ensure that advisors are on board early enough to avoid costly
errors being made. It is also important that public sector capacity
is developed in the process; by pairing advisors with local staff,
and training staff of PPP units. Once this capacity is built, it is
equally important to retain it.
PPP units have played an important role in enabling private
sector participation in infrastructure in some African countries10
where these units have been established. These units are typically
located in Ministries of Finance, and act as the central source of
specialist support for the preparation and procurement of pro-
jects. PPP units may also undertake upstream functions such as
identification and prioritization of projects, or downstream activ-
ities such as contract oversight. Evidence suggests the structuring,
location and staffing have an important bearing on how well PPP
units perform. The location of PPP units in Ministries of Finance,
for instance, facilitates their neutrality vis-à-vis infrastructure sec-
tors originating the PPP projects, and access to Treasury expertise
to assess affordability and sustainability of fiscal commitments.
In principle, PPP units are considered knowledge hubs on PPP
structuring and should be well capacitated and well resourced. In
Africa, the first PPP units were established with donor support,
and benefited from technical assistance in the form of foreign
experts placed in the PPP unit to both put in place detailed

10
Evidence from Egypt, Ghana, Kenya, Malawi, Mauritius, Nigeria,
Senegal, South Africa and Uganda.
74 EMELLY MUTAMBATSERE

regulations, policies and procedure, as well as run the unit in the

short term (Public Private Infrastructure Advisory Facility, 2012).
When PPPs are used as a method of promoting broad-based
economic participation, it is important to build local private sec-
tor capacity. The strategy to increasing participation in the local
private sector should be a comprehensive one, involving not just
local content thresholds in tenders, but capacity building efforts
supported by appropriate curricula in institutions of higher learn-
ing, as well as strategies to ‘localize’ parts of infrastructure supply
chains. This strategy has been applied in infrastructure develop-
ment in a number of middle-income countries including South
Africa, Egypt and Morocco. The renewable energy IPP pro-
gramme in South Africa also provides a good example.

PROJECT DESIGN CONSIDERATIONS

Choice of PPP model: Before choosing PPP as the model of pro-
curement, the public authority should have a clear idea of the
objective it intends to meet through the PPP, i.e., whether to
mobilize private capital, enhance efficiency or improve perfor-
mance on specific parameters such as access. As discussed in
Section ‘Performance’, different PPP options contribute to the key
objectives of engaging the private sector to different degrees. A
second important consideration is determining whether or not
the environment is enabling, what reforms to implement and
what capacities to enhance.
Third is determining if the targeted PPP option offers the best
value for money. Tools such as the public sector comparator
(PSC) model a financial model that estimates the net present
cost to the state if it was to deliver the project under a more tradi-
tional procurement method are used for this purpose. In the
case of the PSC, the estimated cost of public procurement is com-
pared like-for-like to the cost of procuring the project as a PPP.
However, while there is broad agreement that some type of value
for money assessment is required, there is lack of consensus
regarding the choice of options to be compared, whether to use
hypothetical or practical cost estimates, and the best way of
anticipating and costing risks (Leigland & Shugart, 2006). These
analyses can also be expensive when undertaken on a project-by-
project basis. In finance-constrained developing countries, the
alternative is to undertake sector diagnostics that provide broad
policy guidelines with respect to the use of PPPs.
 Infrastructure PPPs in Africa 75

Technical feasibility. The assessment of technical feasibility is not

peculiar to PPPs, but applies to project finance generally when-
ever a new asset is to be constructed. The reason why it is worth
discussing here is it constitutes an important risk that must be
carefully considered and allocated. A PPP solution can allocate
the responsibility of financing technical designs either to the pub-
lic authority or the private party. This is an important distinction,
given that this process accounts for a non-trivial share11 of total
project costs. In the absence of public resources to fund project
preparation, the addition of the ‘design’ function to the PPP
package could expedite projects. However, these large PPP
packages are only attractive to a few well-capitalized firms, thus
inevitably limit competition. The risk of cost-overrun, arising at
time from technical misspecifications or certain unexpected
events encountered during construction, also needs to be allo-
cated among the various players, i.e., the PPP parties, contractors
and equipment suppliers, with important bearing on the overall
cost of procurement through PPP.

Financial viability: While some types of PPPs (such as outsour-

cing and management contracts) can be applied on non-revenue-
generating business lines, most PPP options only make sense for
revenue-generating market segments. It is also necessary, in the
absence of subsidies, that the tariff charged by the service pro-
vider is high enough to cover all costs incurred by the private
party and a minimum expected return on investment. Financial
modelling undertaken on design options is meant to establish the
terms under which a given option is financially viable, thus guide
PPP structuring. A number of key factors are determined in the
process, including the cost-recovery tariff, affordability of the tar-
iff and level of subsidy required, financing structure and expected
returns. Through an iterative process, the financial model helps
determine the optimal PPP terms including allocation of responsi-
bilities and benefits between the public authority and the private
provider. The private partner may require revisions to the origi-
nal PPP structure that allows them to better hedge against certain
(perceived) risks, or to mobilize the required financing for the
project. The main determinants of financial viability cost and
quality of capital, cash flows, tariffs, nature of off-take contract

11
The Programme for Infrastructure Development in Africa estimates
that at least 7% of project costs is allocated to techno-economic studies.
76 EMELLY MUTAMBATSERE

(if applicable), payment guarantees, predictability of operating

costs, subsidy level and type, regulation of profits are therefore
judiciously considered when decisions are made as to whether or
not to participate in the PPP, and robustly negotiated during con-
tract negotiations.

Economic viability: Financial models generally do not consider

the costs incurred by the public authority to make a PPP commer-
cially viable, the welfare benefits of the project to citizens or the
cost of negative externalities. From the public authority’s point
of view, it is important to know all costs associated with the PPP
arrangement, including hidden costs. This includes particularly
the fiscal implications of risk mitigation measures adopted in the
PPP contract. Some economic benefits from adopting PPPs may
also not show up in the financial model, for instance, foregone
government expenditures in the form of investment costs and
subsidies to inefficient public utilities, foreign exchange savings
from the use of more efficient assets to meet demand and eco-
nomic cost of inadequate supply. The economic viability of a PPP
is ideally assessed along all these dimensions, although data con-
straints often restrict the scope of economic costs and benefits
that are included in the economic model.

Integrating social objectives: The typical PPP structure might

require modification to carter for other social objectives of the
state. These include the inclusion of local content in infrastruc-
ture contracts, building local expertise and employee retention in
the case of brownfield12 asset transfer. PPPs could also be
required to specifically serve certain user groups regardless of
whether or not these groups can be served cost-effectively. The
risks and cost implications of meeting these social objectives
would have to be carefully considered and allocated.

Conclusion
PPPs have the potential to improve investments in infrastructure
asset building and rehabilitation, and to improve efficiency in ser-
vice delivery. The analysis of PPP contracts awarded for

12
Brownfield refers to existing production facilities are used to launch a
new production activity.
 Infrastructure PPPs in Africa 77

infrastructure development in Africa between 1990 and 2013

shows that this method of procurement has grown in importance,
and contributed to achieving key economic objectives such as
improving efficiency of public utilities, increasing electricity gen-
eration capacity and enhancing access to ICT services. A number
of factors have been identified as important to enhancing the suc-
cess of PPPs contracts. At a macro level, there is need for (i) con-
sistency of macro policies with the objectives and functioning of
PPPs, (ii) coherent policies across related infrastructural sectors,
and coordinated planning and (iii) local capacity building.
At a micro level, the choice of PPP option should be consis-
tent with (i) the government objectives, that is, whether to mobi-
lize private capital, improve efficiency of public utilities or
improve access; and (ii) with the maturity of institutions. Careful
analysis and appropriate sharing of risks and rewards between
the government and the private partner is important to avoid
costly oversights and minimize disputes during contract imple-
mentation. Moreover, value for money assessments should con-
sider all important costs, also taking into consideration the costs
of administering and monitoring the contract, and sovereign obli-
gations, in order to be useful as indicators of efficiency in pro-
curement. Because political risks and risk perceptions have strong
bearing on bankability of PPPs, it is therefore important that
countries seeking to aggressively pursue PPPs as an infrastructure
procurement model pay attention to these risk factors and estab-
lish a positive track record. These findings suggest that PPP pro-
curement should be well considered and planned to ensure
coherence of a wide range of policies, readiness of institutions
and capacity of public sector actors.

Guidelines for Future Research

This chapter contributes to closing information gaps on a rela-
tively novel policy instrument, and provides useful insights to
support prudent policy making at the time of considerable
growth in PPP application. However, there are outstanding
research questions that have not been fully addressed here. First,
there is need for further work to inform questions around
the quantification and sustainability of sovereign obligations
associated with PPPs. As earlier indicated, there are a number of
sovereign contingent liabilities associated with PPP contracts
sovereign guarantees for payment obligations of state-owned
78 EMELLY MUTAMBATSERE

entities, implicit subsidies associated with PPPs contracts in sec-

tors where tariffs are not cost reflective, political risk guarantees,
foreign exchange risk, among others. As the volume of PPP con-
tract increases, it is fiscally prudent to understand the sustainabil-
ity of these liabilities.
Second, PPPs have been applied in a fragmented manner in
most infrastructure value chains, being restricted to one or more
market segments. The implications of this approach need to be
better understood. It is evident from the analysis undertake in
this study, for example, that the reliance on public utilities to
develop and manage transmission and distribution infrastructure
in the energy sector is restricting the potential benefits from PPPs
in the generation segment of the market. How can markets be
better organized to minimize this form of inefficiency?
Finally, PPPs face numerous risks, beyond those discussed in
this chapter. Some of these risks are becoming more important
with changing values and economic contexts, for example, envi-
ronmental and social risks, and disruptive technology risk. The
former has derailed plans to develop a number of fossil fuel (par-
ticularly coal) and hydropower plants. It is therefore important
to understand if and when these technologies are bankable,
before major investments are made into project preparation. The
latter is of particular interest in renewable energy (wind and
solar), given the fast pace of technological innovation. An impor-
tant question to ask is, should African governments invest in
novel technologies, given that high off-take tariffs will typically
be locked in long-term take-or-pay power purchase agreements?
Or should governments instead invest in more mature, cheaper
technologies? These are important questions that will determine
the long-run performance of infrastructure PPPs in Africa.

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